Social Security can be a huge benefit to your retirement when you have a proper plan. Whether you’ve accumulated a large nest egg or sizable pension, or if you’re dangerously low on savings, Social Security income can give a boost to your retirement lifestyle. Since Social Security is so critical to retirement plans, it’s important to make wise choices about receiving this benefit. Penalties with Social Security can crop up in a couple of situations, so you’ll want to be armed with the right information in order to maximize your retirement income.
You can experience a penalty with Social Security in one of two ways:
You can think of these as reductions in income. They’re not a penalty that you actually pay to Social Security; they just lower the number of your retirement checks.
For those people who take Social Security at an early age, you’ll face a reduction in your retirement benefit. Your reduction is calculated based on how many months early you’re receiving your benefits. If you take Social Security less than 36 months early, your reduction is 5/9 of 1% for each month you’re early. For months more than 36, you’ll receive an additional 5/12 of 1% reduction.
The maximum reduction you can face is 30%. This would happen if you draw Social Security at age 62 with a Full Retirement Age of 67. This is a permanent reduction, so you’ll receive this lowered monthly benefit for the rest of your life.
If you receive Social Security early but continue to work, you’ll be subject to a further reduction in benefits. For 2021, the maximum income level is $18,960. If you make less than this in wages or self-employment income, you’re fine; there will be no further reduction in your Social Security payments.
However, if your income exceeds $18,960, your early retirement benefit will be reduced by $1 for every $2 you earn over the limit. As an example, if you earn $40,000, you will exceed the limit by $21,040. Your Social Security benefit will be reduced by 50% of this or $10,520 per year. This equates to $877 per month.
You may be wondering about the year in which you retire. There is a special provision for retirement; if you genuinely retire, you will not face a reduction in your Social Security benefit due to excess income.
The good news about the reduction due to working is that you will eventually be paid the amounts that you “lost” due to your excess earnings. You will receive the adjusted amount when you reach Full Retirement Age. Once you reach Full Retirement Age, there are no limitations on your income. So, you could work full-time and also receive your full Social Security (although still reduced by your initial early retirement election). Your payments will not be reduced by your wages in this case.
Generally your Social Security earnings aren’t subject to taxation unless you’re also earning income from a job or self-employment. There is a wage limit above which some or all of your Social Security benefits are subject to taxation. The limit is imposed on what is called your Combined Income. Your Combined Income is the sum of:
Taxation on Social Security benefits is split into two tiers. For 2021, if your Combined Income limit is greater than $25,000 but less than $34,001 and if you file taxes as an Individual, 50% of your Social Security income will be taxable. If you file as an Individual and your Combined Income is greater than $34,000, then 85% of your Social Security benefits will be taxable. For those who file jointly with a spouse, 50% of your Social Security benefits will be taxable if your Combined Income is greater than $32,000 but less than $44,001. If you file jointly and your Combined Income is greater than $44,000, then 85% of your Social Security benefits will be taxable.
It may be tempting to consider drawing Social Security early, or to keep working when you receive your retirement benefits. However, doing this can cause you some penalties with Social Security, or increase your taxes. The best way to minimize these penalties, and maximize your cash flow in retirement is to have a sound plan in place before you start taking Social Security.
You’ll want to take a number of factors into consideration, like:
By thinking about these factors, you can make a smart decision on your benefits and minimize any penalties with Social Security. Because these are such important choices, you may want to work with a professional to work out your plan. Texas Medicare Advisors has helped thousands of people with their income planning needs. To get the help you need, call (512) 900-3008 today to get a free consultation.
Once you reach full retirement age, there is no limit on how much you can earn and still receive benefits. Your earnings will only impact the percentage of your benefit that will count toward your gross income for income taxes. For a married couple earning between $32,000 and $44,000 or for individuals earning between $25,000 and $34,000, up to 50% of your benefits will be included in your gross income. If a married couple earns more than $44,000 or an individual earns more than $34,000, up to 85% of your benefits will be included in your gross income.
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